Business Expenses Paid via Forgiven PPP Loans Now Fully Deductible -- Second Round of PPP Loans Now Available:

When Congress passed the CARES Act, authorizing the disbursement of funds under the Paycheck Protection Program, much ado was made over whether or not expenses paid by loan recipients via forgiven PPP loans would be able to deductible against taxable income.  It was clear, from the language of the CARES Act, that forgiven loan amounts would not be includable in taxable income, contrary to the standard tax treatment of forgiven loan amounts.  But the deductibility of business expenses paid via forgiven PPP loans was not explicitly addressed in the legislation. While allowing the forgiveness of loan amounts spent to cover payroll, employer health care, interest, rent and utilities expenses would undoubtedly help businesses keep the lights on, many business owners and tax professionals expressed concern that not allowing businesses to deduct expenses paid via loan proceeds could result in unexpectedly large tax bills in 2021, potentially stymying the anticipated economic recovery.

The IRS’s first crack at answering this question came in April, in the form of Notice 2020-32.  Pointing to IRC Section 265(a)(1) and accompanying regulations, IRS counsel determined that the prohibition on claiming a deduction for any amount, otherwise allowable as a deduction, that is allocable to classes of income wholly exempt from the tax, would preclude businesses from deducting expenses paid via forgiven PPP loans.  Frankly, this determination was unsurprising; allowing deductions paid for by funds not includible in gross income would essentially allow “double-dipping” on these expenses, and as far as I’m aware would be largely unprecedented.  However, that did not stop members of Congress from writing to the Secretary of the Treasury, expressing that it was the intent of Congress for expenses paid by businesses with forgiven PPP loans to be deductible and arguing those expenses are not “allocable to wholly exempt income,” as the loaned funds may wind up being unforgiven, in whole or part.  Congressional intent aside, the arguments put forth by Congress in its letter to Steve Mnuchin were not convincing to IRS policy-makers, who reiterated the non-deductibility of expenses paid via forgiven PPP loans in additional guidance published on November 18, 2020. 

Fortunately for business owners, Congress enacted the Consolidated Appropriation Act, 2021 which was signed into law by the President on December 27th.  Section 276 of the CAA 2021 explicitly states that , “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income [of PPP loans].” On January 04, 2021, the IRS released Revenue Ruling 2021-2.  The Revenue Ruling states that due to the amendments made to Section 276(a) by the CAA 2021, the prior guidance issued by the IRS is now obsolete.  While the Revenue Ruling does not explicitly sanction the deductibility of expenses paid via PPP loans (rather it simply retracts previous guidance to the contrary), the deductibility of these expenses is now clearly outlined in §276(a), and Revenue Ruling 2021-2 therefore signals that business owners are now free to deduct expenses paid via PPP loan proceeds.

This reversal, spurred by public outcry and congressional action, represents a boon for businesses of all sizes and types.  It means, in essence, that the federal government will pick up the tab for certain enumerated expenses, while also allowing the payment of those expenses with “free” funds to reduce a business’s other taxable income on the year. 

If you’ve applied for PPP loans and want to be sure that loaned amounts are properly forgiven, or expenses paid via PPP loans are properly deducted, please contact us. We can guide you through the process of having the loaned amounts forgiven and prepare your returns so that all deductions, even those paid for via forgiven loan proceeds, are properly accounted for.  Furthermore, if you missed out on the first round of PPP loans or may be in need of additional PPP loans, it’s not too late to benefit; the second round of PPP loans, consisting of an additional $284B authorized by CAA 2021 (with $35B specifically earmarked for first time applicants) is open for new applicants beginning today, January 11th, and will be open for applicants seeking a second round of PPP loans beginning on Wednesday, January 13th.  If you held off on applying for PPP loans during the first round of loans due to the uncertainty surrounding forgiveness and deductibility, or you received PPP loans in the past and are wondering whether you qualify for additional loans in this second traunch, reach out to us and we’d be happy to guide you through the process.  Now that the IRS has acquiesced regarding the deductibility of expenses paid via PPP loans, there really is no downside to taking advantage of the Paycheck Protection Program.  We can help you navigate the complexities surrounding the program to ensure that your business can fully utilize the available benefits and properly account for unique timing and basis issues presented by the deductibility of expenses paid via forgivable loan proceeds.